Casino capitalism turns to printing money

Friday, 06 March 2009

Following procedure the central bank of the UK, the Bank of England, sought permission
from the UK Treasury to begin quantitative easing, and was duly given the go ahead by
the chancellor

Despite the formalities there is no due process in creating money out of thin air. It would
be printing money but for the fact that notes and coins only make up a small fraction of
money supply in the economy in any case. Whilst unlikely to have any material impact
on the deeply depressed UK economy, it demonstrates the abject failure of financial
management on a colossal scale.

The creation of money by the central bank of the UK will directly destroy the value of all
Sterling in circulation. This is an incredibly destructive step given that mere confidence
underpins the value of the fiat money supply. The decision to create money by the UK
Treasury and the Bank of England is yet another example of a capitalist model that is
intellectually bankrupt!

This grossly misguided step to print money is the latest in a series of failed capitalist
policies to revive the beleaguered economy. It could literally be the last throw of the dice
in casino capitalism. In just over a year hundreds of billions of pounds have been pumped
into the financial markets to increase so-called liquidity; numerous banks have been
nationalized; interest rates cut to effectively zero; hundreds of billions tied up in
guaranteeing value-less bank assets; taxes cut and public spending increased.

In spite of these unprecedented set of measures the economy is sliding further into
depression: businesses are collapsing; unemployment is accelerating; and homelessness is
rising. Meanwhile, the public debt is into several trillions and rising as more banks and
industries in the economy run to the Government for bailouts.

The capitalist banking model, which precipitated the crisis, to lend (or create money) by
100 times or more the size of actual deposits was unsustainable. Based on such a loaded
formula no bank is too big to fail. Now each measure deployed to deal with the crisis is
more disparate and panicked then the last. This capitalist economic model, flawed in
origin, is imploding.

Capitalism’s use of measures that contradict its ideology like nationalization, money
creation and protectionism also demonstrates that capitalists can not be trusted to protect
and safeguard peoples property and property rights. This is a clear indictment of an
ideology that professes to champion free enterprise.

In contrast, in the Islamic economic system the Shariah laws clearly distinguishing the
private, public and state property. The state can not usurp peoples private properties while
public properties are for the benefit of all citizens. The money supply in Islam according
to Shariah is always 100% backed by gold and silver and so money has in effect an
intrinsic value which therefore ensures and safeguards the value of money in peoples’
pockets.

By the passing of each day the flaws in capitalism are progressively being exposed. It can
be seen that the capitalist model offers no long term, sustainable solutions for humanity.
The Muslim world should remove the intellectual yoke of failed capitalist economics and
implement the sublime Shariah laws related to the economy via the political application
of the Khilafah system.

Essay: Virtual Economy - Root Cause Analysis of The

Current Financial Crisis
Monday, 17 November 2008 19:44 Dr. Mohammad Malkawi

In a statement made to a congressional committee on April 3, 2008, the Chairman of the

Federal Reserve Bernanke said that "if Bear Stearns had been allowed to fail, it would
have led to a "chaotic unwinding" of Bearn Stearns investments held by individuals and
other financial institutions. Moreover, the adverse impact of a default would not have
been confined to the financial system but would have been felt broadly in the real
economy through its effects on asset values and credit availability"[1].

In an article published by Newsweek, October 11, 2008, Daniel Gross writes [3]: "Back
in 2002, Apple's stock was trading far below the level of cash on its books, ascribing a
value of zero to its brands and products, compared with several billion at the height of
the boom".
Both statements refer to the existence of two views of the economy: a real economy
which is reflected by the level of cash on corporate books, and an inflated, exaggerated
view which is reflected in the current stock values of the market. The second view of the
economy will be referred to as a virtual economy in this article. Virtual economy, in this
context, differs from what is being called virtual economy commerce [2], where
customers trade in a virtual imaginary product with certain specifications and an
imaginary value. However, this will not be the subject of this study.

The second type of virtual economy (VE) is the one that is important and is strongly
related to the failure of the financial capitalist system as is being witnessed today. VE
allows the economy to appear much larger than its real size. This economy is based on
the assumption that the real money will not be tapped into and therefore, it is possible to
deal with an assumed larger (virtual) value for the money.

A good example of this scenario is the case with Donald Trump. He ran projects worth
billions of dollars, while being more than 50 million dollars in debt. He was about to file
for personal bankruptcy in 1989 when he was pressed to pay some of his debts.

A parallel concept to virtual economy exists in computer systems, where the concept of
virtual memory is used. Virtual memory is a special type of organisation which allows the
memory in the system to appear much larger than the real size of the memory. With this
type of organisation, it is possible to execute program applications which require much
larger memory than the system actually has. Virtual memory organisation in computer
systems remains a smart way of running applications. However, there are some cases
where an application may break the limits of virtual memory and cause the system to
thrash, i.e. to fail. This happens when an application insists on using more than the size of
real memory instantly, at one given time.

In a similar manner, virtual economy (organisation) provides two views of the economy.
One is the real value of commodities and services in a given economy which corresponds
to the real economic growth and production. The second view of the economy represents
the imaginary value of stock prices and the accumulation of interest (usury) in the banks.
A virtual economy system, similar to a virtual memory systems, is bound to crash (thrash)
at any point when the instant demand for finance at any given time exceeds the real value
of the real economy. The current financial crisis in the US and the world at large is a
striking example of a virtual economy crashing (or thrashing).

The phenomenon of a virtual economy, where the money in transactions appears much
larger than the real money, began to surface at the level of state economies at the end of
the 19th century when financial markets began to take shape in New York. This
phenomenon grew to be an integral part of capitalist economies, especially in the US and
in Europe due to three major reasons, namely: stock markets, interest based economy, and
the removal of gold as a basis for the monetary systems. At the political front, the cold
war between the capitalist and socialist camps in the 2nd half of the 20th century further
strengthened the virtual economies in the west. We will examine these three factors in
some detail in the next few sections.

1. Stock Markets and the Virtual Economy

Stock market activities at the start of the 20th century created a new phenomenon in the
economy, where the wealth associated with stock values grew at a much higher rate than
the wealth associated with the real economy. When the stock market collapsed in New
York in 1929, economists attributed the crash to the great difference between the inflated
values of stocks and the values of the real assets of the economy.

The Economist magazine reported on 2/11/1929 that "there is warrant for hoping that the
deflation of the exaggerated balloon of American stock values will be for the good of the
world." To understand this aspect it has been found that the prices of financial market
increased during the preceding period from 1925 to 1929 by 120%, while economic
growth for the same period did not exceed 17%. And when the market collapsed, it lost
over 93% from its value, which means that the market returned to its real value which
was obviously much lower than what the stock market indicated. The same scenario
repeated itself in 1987 when the market collapsed again, and as observers again noted
financial market had been grossly inflated compared with the real size of the economy,
such that the difference between the virtual economy and the real economy was more
than 200%. And by the end of the twentieth century the virtual economy was again three
times the size of the real market value and this scenario came to be known as the Internet
(or DOT COM) Bubble.

The result is that the nominal values of stocks do not reflect the reality of economic
production. It is possible to increase the value of the shares of a given company without
any real increase in production or profit achieved by that company; this was the case with
Amazon, where its stock value exceeded $300 at a time when the company had not
achieved any profits. Enron is another example, where the rising value of their stock was
based on false information about fictitious profits.

These kind of financial activities, transactions and dealings create two faces for the
economy: a real face linked to the economic growth and production which indicates the
real strength of the economy. And an imaginary side, that reflects the image seen and
observed by the local and global community. When the difference between the two sides
is small, there does not appear to be a serious problem in the economy. When the
difference, however, is vast as is the case now, in 1987 and in 1929 it is dangerous and
may lead to devastating consequences for many years, as happened with the Asian Tiger
economies in the late 1990's.

The capitalist countries are aware of the magnitude of the problem, and its seriousness,
and keep developing plans and alternatives to prevent or delay an inevitable devastating
collapse, to mitigate the effects of the collapse, or to exit quickly in case a collapse
happens. A good example of such plans is the recent bail out of the Bear Stern Bank,
which almost collapsed after the drastic decline of its stock prices. (The most recent
bailout of more than a trillion dollars in US and Europe occurred few months after this
article was written).

The direct cause of a stock market collapse is the attempt made by some investors to
transfer what they own from fictitious money to real money. As an example, let's assume
that the real money is 10% of the total virtual money. This means the amount that can be
turned into real money, is no more than 10% of total capital, and the rest is equal to none.
So when the owners of the shares notice that a major investor started selling his
possessions (to convert them to real money), they panic and start selling their possessions
hoping to cash in some real money before the collapse. Then a collapse takes place and
brings everything to the foundation (real money).

Let's work through the example more thoroughly. Assume that there are 1000 shares in a
company. Also, assume that each share is worth $100. So the total stock value of the
company is $100,000. For the sake of argument, assume that the real value of the
company is $10,000. In other words, the real value of the company is 10% of the virtual
value. Now assume that a major investor sells 50 stocks at $100 and cashes $5000. If the
rest of the share holders start selling their shares hoping to get real money from the
company, they will be able to get no more than $5000 at best, which translates into $5 per
share. Now if one more person was able to sell 50 shares at say $50 and cashes $2500,
then the rest of the crowd will have to share the remaining $2500 at $2.5 a share.
Eventually when all $10,000 are gone, the share will go to zero. This is how the stock
values of Enron and Martha Stewart companies collapsed.

The danger of the virtual economy is that it creates a state of delusion in the economy,
which can deceive senior economists and politicians, and drives them to undertake
projects larger than their real wealth. There could be a temporary positive effect from this
delusion, especially when competing with others for large projects. America has benefited
greatly while in a conflict with the Soviet Union during the cold war era, where the
Soviet Union used real money to finance its projects, and America used the virtual
economy for its own projects. But when a state is exposed to a financial or political crisis
larger than the size of its real economy, the illusion may push the state into a losing
gamble. The current wars in Iraq, Afghanistan, Somalia and the devastating effects of
hurricanes in the US must have contributed to the recent financial crisis in the west. Some
countries may sometimes intentionally create real crisis for other countries that depend on
the virtual economy, in an attempt to push them to the limits of their real economies. Note
also that a sudden collapse of the virtual economy brings the economy to levels much
lower than the real value of the economy.

2- The Usury and the Virtual economy

The objective of the financial policy in the capitalist economy, as stated by the bylaws of
the Federal Reserve Bank in the USA, is to maintain the highest return on production and
labour and to sustain price stability. This objective will be achieved through a mechanism
that controls the value of usury (interest rate). During a recession in the economy, the
state reduces the value of usury in order to encourage borrowing and increase the
demands on goods and services. Conversely, the value of usury would be increased to
curb inflation. The point here is to recognize the importance of usury for the capitalist
economy as the most important tool to control the ups and downs of the economy. This
explains the wide spread of financial institutions that offer loans to individuals,
companies, institutions and even governments themselves.

Within this usury based economy, the money flows in two directions. In one direction, the
money flows from the investors towards the bank in a form of deposit payments. The
other direction is from the banks to the investors in a form of loan payments. Except for
cases where the inflation rate is higher than the interest rate during the repayment period,
the amount of money going towards the bank is steadily more than the amount of money
going towards the investors. If the real money is the money which the investors deal with
to increase production and to maintain price stability as required by the fiscal policy, this
money will certainly be less than the money that accumulates in the banks. This is the
main reason for the difference between the real money and the virtual money. And there
are two cases that lead to this phenomenon.

The first case is when the bank performs the lending process. Let's assume that the bank
provided a loan of 100 million dollars with 5% usury for 1 year. Let's assume also that
the inflation during this period was 2%, the real interest rate becomes 3%. Now presume
as well that the borrowed money (100 million) was spent on profitable projects and the
total profit was 2%. Now the total value to be paid back to the bank = 103 million dollars,
while the real money which is the sum of the initial money and the profit is equal to $102
million. This means that (1) $million accumulates in the bank account which does not
correspond to actual value in reality. This surplus is the usury which is described in the
Qur'an (That, which ye lay out by usury for increase through the property of (other)
people, will have no increase with Allah). Note that the biggest borrowers in the world
are governments which borrow money to pay for their operations and not for profit
production. Consequently, the accumulated pure usury will be much higher than the ratio
of (1%) in the above example. That is why usury money can reach during a specific
period of time hundreds of billions of dollars and up to twice the amount of real money. It
is worthwhile to know that the real economic growth rate in the US was no more than
3.5% during the last (30) years, while the actual interest rate was more than (8%). This
means that virtual money over (30) years was (135%) of the actual value of money. So if
the actual value of the US economy was 5 trillion dollars, the value of usury excess of the
true value will be $6.75 trillion dollars. This makes the virtual money value (11.75)
trillion dollars.

The second case that leads to an increase in the virtual money is when investors deposit
their money in the banks for investment in usury. If investors deposit in the bank (100)
million with (5%) interest after taking into account inflation, and for a period of (10)
years. The value of the money invested becomes (150) million. For the bank not to lose
money, it in turn invests the (100) million. Let's say the bank gains (7%) by investing its
money ($ 170 million); if (5%) of that investment was part of productive investment by
the bank and the rest was pure usury, we will have (20) million usurious money which
has no real value in reality. The reality is that most banks do not invest their money in
production processes, but rather by investing in other banks and by recycling the loans to
other borrowers. This makes the virtual money increase repeatedly and multiple times.

Either way, the resultant quantity of the money accumulated in the banks is much more
than the quantity of the initial real money that represents the (real) production. However,
what encourages and motivates the continuation of the increase in virtual money is the
absence of the urgent need to withdraw large amount of funds from many banks at once.
When one of these banks gets exposed to pressure from investors and depositors to
withdraw amounts of money (Run On The Bank) that exceed the amount of the real
money, the bank soon collapses for the lack of ability to meet customer needs, as
happened with the Bank of Boston in the early eighties of the last century. If the
Government does not intervene to save the bank and back it up by its funds, a collapse of
the bank becomes imminent. When the problem becomes severe and has the potential of
affecting several financial institutions, the big countries such as the US begin to print and
pump money that could match the amount of the virtual money. This leads to massive
inflation, decline in prices and weak production and may lead to a huge financial disaster.
Sometimes a disaster may occur by withdrawing large amounts of investors' money at the
same time from the banks (similar to the real estate and credit crisis in the US - this
occurred few months after writing this article).

3- Breaking away from the Gold Standard

The virtual economy would have not become a genuine trend, if the main currency (i.e.
Dollar) remained linked to the gold standard as per the Bretton Woods Agreement in
1944. The agreement established a clear base of exchange into gold within a fluctuation
rate of not more than (1%); it also set the bases on how to convert currencies into gold.
The existence of such a law can not permit any State economy to appear much larger than
its real size. That would cost its stockpile of gold to deplete. There will not be sufficient
gold to match the fictitious numbers of the virtual economy. But when the US turned
against the Bretton Woods Agreement (in the early 1970's) and broke the link between the
dollar and the gold standard, it freed its economy from the rein of the market prices
without any restrictions. The US was not satisfied with breaking the linkage between the
dollar and the gold, but it also broke the link between the value of its currency and the
economy. It made it possible for money to grow more rapidly and at much higher rates
than the growth of the economy. It was this separation between money and gold on one
hand, and between money and economic growth on the other that enabled the existence
of the virtual economy and its tendency to grow at an alarming rate. (Recently the Prime
Minister of Britain Gordon Brown called for the reconstruction of the Bretton Woods
agreement - Report on Business.com Oct. 14-2008)

4- Conclusions
Is the presence of a virtual economy a matter of strength or weakness for the State? There
is no doubt that the presence of a virtual economy leads to the emergence of the state as a
powerful state with an ability to manoeuvre, threaten and impact other countries. A
virtual economy and strength may allow one country to destroy the economies of other
countries especially if those countries rely on a real economy or have less ability than the
attacking state. America is still using the virtual economy to influence Europe, Japan,
China and others. However, the virtual economy is like an Achilles' heel for these States.
While it appears as a point of strength, it also could be a potential point of destruction for
the state. When a state is exposed to real crisis, whether caused by disasters or wars, the
crisis would drain up what is equivalent of the real economy of that State which in turn
may lead to the bankruptcy of the State economy.

Today, the major capitalist countries in Europe and the US have built their enormous
economies on the basis of the virtual economy. Most importantly, these countries cannot
go back to rebuilding a more realistic economy. The financial politics are based on usury
and exorbitant wealth, and the steady increase of the money has become the only goal of
their economic and financial policies. And from here we cannot imagine rebuilding the
economy in the capitalist countries to become closer to reality, and therefore they will
remain vulnerable to destruction and collapse.

And Allah ‫ سبحانه وتعالى‬says:

َ ‫ن الْمَسّ َذِل‬
‫ك‬ َ ِ‫ن إِلّ كَمَا َيقُو ُم الّذِي يَ َتخَبّطُهُ الشّ ْيطَانُ م‬ َ ‫ن الرّبَا لَ َيقُومُو‬ َ ‫الّذِينَ َيأْ ُكلُو‬
ٌ‫ظة‬ َ ِ‫ل الْبَيْعَ َوحَرّ َم الرّبَا فَمَن جَاءهُ َموْع‬ ّ ‫حلّ ا‬َ ‫ل الرّبَا َوَأ‬ُ ‫ِبأَنّهُ ْم قَالُواْ إِنّمَا الْبَيْعُ مِ ْث‬
ْ‫صحَابُ النّارِ هُم‬ ْ ‫ك َأ‬
َ ِ‫سلَفَ َوأَمْرُ ُه ِإلَى الّ وَ َمنْ عَا َد َفأُ ْولَـئ‬ َ ‫ى َفلَهُ مَا‬ َ َ‫مّن رّبّ ِه فَانتَه‬
َ‫فِيهَا خَالِدُون‬
"Those who devour usury will not stand except as stands one whom the Evil One by
his touch hath driven to madness. That is because they say: "Trade is like usury," but
Allah hath permitted trade and forbidden usury. Those who after receiving direction
from their Lord, desist, shall be pardoned for the past; their case is for Allah (to
judge); but those who repeat (the offence) are Companions of the Fire; they will abide
therein (forever)." [Quran Chapter 2; verse 275]

For more:

www.khilafah.com

www.harunyahya.com

www.irf.net/irf/download

www.slideshare.net/heyalipona